Home Equity Loans Creative Small Business Financing
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Home Equity Loans: Innovative Small Business Financing
Unlock Funding for Your Small Business
You don't need investors or traditional bank loans to kickstart your small business. If you own a home or have access to credit cards, you already have potential financing options. One effective approach is leveraging a home equity loan, with banks generally offering loans up to 125% of your property's fair market value (FMV).
Credit Card Financing for Businesses
Opening credit cards in your business's name can be a smart initial move. Not only can you manage expenses, but the IRS also allows interest deductions on these cards.
Expert Insight: David Newton, a professor of entrepreneurial finance at Westmont College, suggests two main credit card uses:
1. Acquiring assets like equipment and supplies.
2. Maintaining cash flow as capital.
However, Newton warns that relying on credit cards can be risky. Transitioning to more traditional bank financing or leasing as soon as you hit your break-even point is advisable. This shift helps cover costs of goods sold (COGS) and overheads.
The Home Equity Loan Advantage
Home equity loans offer a conventional financing option. For instance, if your home is worth $300,000 and your mortgage is $100,000, you have $200,000 in equity. With a loan of up to 125% FMV, you could access $275,000 to fund your business.
While credit card interest is fully deductible, home equity loan deductions are capped by the IRS at $100,000 or the actual home value minus the mortgage, whichever is lower.
Considerations and Risks
Entrepreneur.com highlights potential downsides of home equity loans:
- Up-front fees, closing costs, or annual charges.
- Possibly large balloon payments or higher monthly payments.
Ensure you have a repayment plan if you opt for a balloon payment; it might require additional borrowing. The biggest risk? Using your home as collateral means you could lose it if your business fails or you default on the loan.
Conclusion
Choosing the right financing option is crucial for your small business's success. Whether using business credit cards or a home equity loan, weigh the risks and benefits carefully to make an informed decision.
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